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An Important Inconsistency at the Heart of the Standard Macroeconomic Model

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  • Wynne Godley
  • Anwar Shaikh

Abstract

The neoclassical macroeconomic dichotomy between real and nominal variables is shown to be generally false, even within the standard structure of the model. The model implicitly assumes that disbursements via interest payments on bonds somehow ensure that all profits are disbursed. But the two are generally different. Forcing them to match renders the model mathematically inconsistent. Alternately, distinguishing the two rectifies the inconsistency but destroys the dichotomy between real and nominal variables and dramatically alter the model's outcomes. One striking consequence is that a rise in the money supply can lead to a fall in prices.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Journal of Post Keynesian Economics.

Volume (Year): 24 (2002)
Issue (Month): 3 (April)
Pages: 423-441

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Handle: RePEc:mes:postke:v:24:y:2002:i:3:p:423-441

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=109348

Related research

Keywords: Flow of funds; Macroeconomic models; Monetarism; Neoclassical economics;

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  1. Buiter, Willem H, 1980. "Walras' Law and All That: Budget Constraints and Balance Sheet Constraints in Period Models and Continuous Time Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 1-16, February.
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Cited by:
  1. Kakarot-Handtke, Egmont, 2012. "Intertwined real and monetary stochastic business cycles," MPRA Paper 42793, University Library of Munich, Germany.
  2. Kakarot-Handtke, Egmont, 2012. "The rhetoric of failure: a hyper-dialog about method in economics and how to get things going," MPRA Paper 43276, University Library of Munich, Germany.
  3. Andrew Mearman, 2010. "What is this thing called ‘heterodox economics’?," Working Papers 1006, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  4. Jamee K. Moudud, 2000. "Crowding In or Crowding Out? A Classical-Harrodian Perspective," Macroeconomics, EconWPA 0012001, EconWPA.

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